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updated: 8/31/2012 6:28 AM

India disappoints with 5.5 percent growth

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Associated Press

NEW DELHI -- India's economy grew a disappointing 5.5 percent in the last quarter ending June, marking a sharp slowdown from the 8 percent growth in the same period a year ago.

The economy grew only 5.3 percent in the quarter before, signaling a sharp downturn from previously robust growth.

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Economists say the dismal performance of the economy reflects the government's disarray and inability to push through crucial economic reforms.

The economic figures for the April-June quarter released Friday by the government showed that industrial and investment activity had failed to pick up pace while the services sector weakened.

Agriculture grew 2.9 percent compared to 3.7 percent a year ago, while the services sector declined to 6.9 percent compared to 10.2 percent.

Manufacturing grew by a negligible 0.2 percent against 7.3 percent growth in the same period last year.

The only bright notes were in the construction sector, which showed a robust 10.9 percent growth; and financing, insurance, real estate and business service activities, which expanded by 10.8 percent.

With a political impasse in India's Parliament holding up government decision-making, and the central bank refusing to reduce interest rates, companies have shied away from investments.

Over the past year, the government has been roiled in a string of corruption scandals involving government ministers and bureaucrats.

Opposition parties have paralyzed parliamentary business since the latest scandal erupted on the sale of coal mining blocks without competitive bidding. The national auditors said the sale was expected to net private companies windfall profits of up to $34 billion.

Other bad news came from the weather: a weak monsoon season hit farms dependent on rainfall, pushing up food inflation.

C. Rangarajan, who heads the prime minister's Economic Advisory Council, said the 5.5 percent figure was "consistent with the 6.7 percent growth we had projected." He said he expected growth to pick up in the last two quarters.

He said the government was committed to giving a push forward to the economy.

"The investment sentiment must improve. The strong growth in some of the key infrastructure sectors like coal, power, steel and cement could lead the way for improving the investment climate," Rangarajan said.

Industry leaders and economic analysts said the figures were disappointing and reflected a deceleration of manufacturing and services. Slowing factory output and investment would hurt long term growth, they said.

The Confederation of Indian Industry, the country's main industry organization, said it was "deeply concerned with the continuing downward trend in GDP growth."

CII head Chandrajit Banerjee warned that opportunities for the revival of economic growth would soon peter out if the economy continues its downward spiral.

"The GDP numbers leave no doubt about the criticality of the situation and we once again appeal for a coordinated monetary and fiscal intervention to address this deteriorating situation," Banerjee said.

Other economic commentators felt the GDP numbers were in line with expectations.

"Given the headwinds for agriculture due to deficient monsoon and the decline in domestic and global consumption along with the ongoing deterioration in investments, the outlook on GDP is very cautious," said Shubhada Rao, the chief economist at Yes Bank.

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